[BOJ] July Interest Rate Decision: Raising Rate Unexpectedly by 15bp

Remarks of Officials

Summary:

The Bank of Japan raised its policy rate unexpectedly by 15 basis points to 0.15%-0.25% on Wednesday. If the positive outlook for economic activity and inflation continues, the BOJ will accordingly continue to raise the policy interest rate.

The Bank of Japan (BOJ) raised its policy rate to 0.15%-0.25% on July 31, and its outlook report showed:

Japan's economy has recovered modestly, but weakness has been seen in part. The overseas economy grew moderately. Exports and industrial production were broadly flat. In this context, business fixed investment showed a moderate growth trend, and employment and income situation has improved slightly. Despite rising prices and other factors, private consumption has remained resilient. However, housing investment has been relatively weak, and public investment has been more or less flat.

On the price front, the year-on-year rate of increase in the CPI has been at around 2.5% recently, as services prices have continued to rise moderately, reflecting factors such as wage increases, although the effects of a pass-through to consumer prices of cost increases led by the past rise in import prices have waned. Inflation expectations have risen moderately.

Core CPI (all items less fresh food) is expected to grow at a YoY rate of around 2.5% in 2024, which will be 2.1% in 2025, and 1.9% in 2026.

The median real GDP growth rate is expected to be 0.6% in 2024, and 1.0% in 2025 and 2026.

At the same time, with the output gap improving, medium- to long-term inflation will rise as the virtuous cycle between wages and prices continues to strengthen. As a result, the underlying CPI inflation rate will rise gradually. In the second half of the projection period, it is likely to be at a level that is generally consistent with the price stability target. In this process, labor market conditions will be tightened. This is partly due to the slower growth in the labor force participation rate among women and the elderly. Therefore, upward pressure on wages is expected to intensify.

If the positive outlook for economic activity and inflation continues, the BOJ will accordingly continue to raise the policy interest rate and adjust the degree of monetary accommodation.

BOJ Interest Rate Decision

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[BOJ] July Interest Rate Decision: Raising Rate Unexpectedly by 15bp

BOJ Interest Rate Decision

Risk Disclosure